Ringgit breaches psychological mark of 4.50 against US dollar

PHOTO: The Straits Times

PETALING JAYA - The ringgit has hit the psychological mark of 4.50 against the US dollar, as foreign investors continued to pare down their holdings of Malaysian government bonds.

At the same time, Bank Negara issued an extensive FAQ pertaining to the onshore trading of the ringgit in conjunction with the effort to stabilise the Malaysian currency, which had been buffeted by various external factors.

In a second day of decline yesterday, the ringgit fell 0.1 per cent against the US dollar to close at a fresh 19-year low of 4.4985 against the greenback. This compared with the previous day's close of 4.4938.

Foreign selling pressure on local debts was reflected in the rise of yields, with the benchmark 10-year Malaysian Government Securities (MGS) yields rising 2.8 basis points to 4.226 per cent.

At noon, the ringgit touched an intra-day low of 4.5002 against the greenback, the lowest level since 1998 during the height of the Asian financial crisis.

The government then decided to peg the ringgit at 3.80 against the greenback to stop the currency's decline.

The impact of the falling ringgit on Singapore

As of yesterday, the ringgit, which have lost 0.27 per cent against the US dollar since the start of 2017, was the third-worst performer among Asian currencies, after the yen and Indian rupee.

According to a dealer, the continued weakness of the ringgit was due to dampened foreign investors' appetite for ringgit-denominated assets. This came as the US dollar continued to rally on improving economic outlook and the prospects of higher interest rates.

That the foreign holdings of Malaysian bonds - in particular, the MGS - remained high would only raise the risk of capital outflow from the country and put the currency under further pressure, he noted.

"There is a lack of foreign appetite for ringgit-denominated assets, as investors expect US Treasury yields and interest rates to trend higher on improving US economic outlook and optimism that US President-elect Donald Trump would pursue fiscal expansion to fuel the world's biggest economy," the dealer explained to StarBiz.

"The ringgit is not in a good position, as the high foreign ownership of Malaysian government bonds, has increased the risk of more capital outflows in the near term," he added.

The ringgit also weakened against other major currencies yesterday.

It slipped against the Singapore dollar to 3.1096 from 3.1008; against the British pound sterling to 5.5163 from 5.5040; and against the euro to 4.6837 from 4.6892.

Most analysts concurred that the outlook of the ringgit remained negative due to the high risk of further capital outflows.

A global bond market rout triggered by the "Trump Tantrum" in November 2016 saw Malaysia recording the largest amount of foreign outflows from its domestic debt securities on record at RM19.9 billion (S$6.38 billion).

As at end of November 2016, foreign holdings of total outstanding MGS fell to 48.4 per cent from 51.9 per cent in the preceding month, while foreign holdings of total outstanding Government Investment Issue fell to 9.6 per cent from 12.6 per cent.

Meanwhile, a total of RM19.3 billion of MGS was due to mature in the first quarter of next year, thus raising the risk of maturity-driven outflow if sentiment remained negative on emerging markets, according to a recent report by Maybank Investment Bank.

Separately, Malaysian Rating Corp Bhd (MARC) in a report last week said the still-high foreign holdings of domestic debt papers could imply a risk of the ringgit remaining weak if the selloff persist in the short term.

"Judging by past experiences, we do not rule out the possibility of foreigners offloading about 20 per cent-25 per cent of their current holdings, which is less than 50 per cent-70 per cent reduction of their holdings during the previous cycles. Our estimate is premised on the fact that a bigger chunk of the holdings are now comprised of 'longer-term investors' such as central banks and pension funds," MARC said.

"On balance, we think that there is still room for further depreciation in the ringgit against the greenback, although the weakness will not likely continue in the medium term," it added.

Last month, Mizuho Bank predicted the ringgit would hover between 4.30 to 4.70 to the US dollar in the first quarter of 2017.

Similarly, Westpac global head of market strategy Robert Rennie told CNBC recently he expected the ringgit to weaken to 4.55 against the US dollar by the end of March 2017.

He said slower economic growth in China and domestic political issues would affect appetite for Malaysian assets. He noted capital flight from Asia could gain momentum if US Treasury yields continued to rise towards 3 per cent and potentially beyond.

Ten-year US Treasury yields had risen from 1.8 per cent to about 2.4 per cent since the US Presidential election last November. According to a Bloomberg survey forecast, the yield to rise to 2.7 per cent by the end of this year on the back of improving economic data, and speculation President-elect Donald Trump would pursue fiscal expansion that would fuel the world's biggest economy.